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Compensation
Compensation, Compensation functions ,
compensation policy, criteria for
compensation policy, determinants,
compensation dimensions, types of
compensation, Reward management

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Introduction
 One of the most difficult function of HRM is that
of determining the rates of monetary
compensation.
 From a cost perspective alone , effective
management of employee compensation is
critical because of total operating cost
 Another reason for studying compensation from
the organizational perspective is to assess its
impact on wide range of employee attitude &
behaviors
 Influences job satisfaction, attraction, retention,
performance, skill acquisition cooperation .

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Compensation functions
Attracting qualified applicants
Retain competent employee
Serves as incentives to
motivate employees to put
forth their best
Minimizing the cost of compensation
Compensation
functions

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Compensation administration
 Primary purpose of comp. admin is to assure
management a sound comp. system & employee an
equitable administration program
 Objectives:
 Equitable payment in proportion to relative work
 Consistency of payment between comparable
occupation
 Adjustments of payments in relation to changes in
labor market
 Recognition of individual capacity & proficiency
 Procedure to solve compensation problems
rationally

5. Concept of compensation
 Compensation emphasis a fair day’s pay for fair
day’s work. Generally time is the basis of
payment. It is paid hourly, weekly or monthly. If
the employee works more than stipulated time,
he gets overtime. If less, he is marked under-
time. In other words, employer buys the time of
the employee. Its simple and measurable.
Purely extrinsic. It contains all forms of financial
incomes and tangible benefits and services that
an employee receives as apart of the
employment relationship. 5

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Types
 Direct Compensation- which are directly
related to work outcomes (salary, bonus,
Overtime allowance, shift allowance, Profit
sharing, commission etc)
 Indirect Compensation (wage supplements
or fringe benefits like pension , PF, medical
or health insurance, sick leave etc)

7. Base compensation and
supplementary compensation
 Base compensation is the monetary benefits in the form of wages and
salaries. It is giving remuneration to the workers for doing the work.
 Supplementary compensation: Now a days organizations use
supplementary compensation over and above the base compensation. It
helps in satisfying the employees and retaining them for a long time. It can
be given in the form of various amenities like housing, medical educational
facility. Also called fringe benefits or hidden payroll. The basis purpose of
fringe benefits is to maintain efficient human resources in the organization
and to motivate the employees.
 Supplementary compensation is again divided into following types
1. Protection against hazards- illness, injury, old age, permanent disability
2. Services to employees : housing, low cost loan, food , medical allowance,
day care center for children, educational facilities to the employees for their
services
3. Payment for time not worked- paid vacation, sick leave, holidays, lunch
period.
4. Legal payments: lay off compensation, old age benefits
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8. Characteristics of fringe benefits
 These are distinctly additional to the regular wages paid to the
workers
 Primarily for the advantage of the employees
 Only those benefits within the purview of fringe benefits which are or
can be expressed in cash terms.
 Scope of fringe benefits differ from welfare services. FB are
provided by the employer where as welfare services are provided
by other agencies as well. Ex. YMCA’s Sanvedana- child care,
training and development
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Compensation determinants
 Product market– an organization will find itself at
competitive disadvantage in the product market
when it’s labor cost exceeds its competitors
because it increases the price of the product
 Labor market—A pay level that is too low
relative to its competitors could lead to
difficulties in attracting the qualified employees.
in order to avoid that situation some companies
say that their pay is equal to or better than other
companies

10. Factors influencing compensation
 Demand & supply of labor
 Labor union pressure
 Nature of the job as determined by job description
 Size of the organization and its ability to pay
 Product market & labor market
 Psychological and social factors like employee satisfaction and
security
 Salaries paid by similar firms
 Government policies on wage determination
 Cost of living of the employees
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Compensation policy (criterias)
Glueck 1978
 Adequate
 Acceptable
 Balanced
 Cost effective
 Incentive
 Security
 Equitable

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Compensation Principles
(D.S. Bench)
 A clear cut plan to determine differential pay level .
 General level of wages and salaries to be at par with
the industry.
 Adequate care to distinguish people from jobs.
 Ensuring equal pay for equal work irrespective of
individual considerations.
 Suitable plan to adapt equitable measures for
recognizing individual differences and contributions
 Provision for handling wage grievances.
 Adequate information to both employees and the
union regarding the procedure.

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Compensation Dimensions
 Pay for work and performance
 Pay for time not worked
 Disability Income Continuation
 Deffered Income
 Spouse(Family) Income Continuation

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Methods of Payment
 Time rate system- number of hours worked
 Payment by Results system-
 Straight Piece work (rate proportionately
increases with output)
 Differential piece work (rate increases with
output but disproportionately)
 Measured day work

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Reward management
 Development, implementation, maintenance
communication and evaluation of reward
process.
 These process deals with the assessment of the
relative job values, the design of pay structure,
performance management, paying for
performance, competency, skill, provision of
employee benefit and the management of
reward procedures

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 Encompasses the organization culture,
underpinning the core values that
increases the motivation and commitment
of the employees

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Rewards
Financial rewards.
In addition to regular
compensation, FR are monetary
incentives that an employee
earns as a result of good
performance. Ex. Bonus, pay
rises etc
Extrinsic
non financial
rewards
Intrinsic
Status, recognition,
autonomy etc

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5 conclusion as to what determines satisfaction from
rewards
 Satisfaction is a function of how much is
received and how much the employee feels that
he should receive
 The perception what others are getting
 Should get intrinsic reward as well
 Many extrinsic rewards are important because
they lead to the other rewards
 Different people have different desire in terms of
rewards

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 Financial rewards =base pay + variable
pay + ee benefits and pensions
 Non financial rewards=status , recognition
etc
 Total remuneration represents the
complete worth of financial rewards to the
ees.

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